Housing Recovery Leaves Some Behind

CNBC's Diana Olick reports that states where a judge is involved in the foreclosure process are lagging in the housing recovery, because of incredible backlogs.

While the national housing picture may look brighter, certain states are still mired in a mess of distressed homes.

These states tend not to get much attention in the national discussion because they are not the well-known "sand states" that fell the hardest during the housing crash and prompted the biggest headlines. New York, New Jersey, Massachusetts and Maryland are still sitting on a ticking time bomb of troubled loans.

Meanwhile other states, such as hard-hit Arizona, California and Michigan are recovering far more quickly. The difference? They do not require a judge in the foreclosure process. So-called "non-judicial" states are recovering faster than "judicial" states.

"On average pipeline ratios—the rate at which states are currently working through their existing backlog of loans either in foreclosure or serious delinquency—are almost twice as high in judicial states than non-judicial states," said Herb Blecher of Lender Processing Services.

"At today's rate of foreclosure sales, it will take 62 months to clear the inventory in judicial states as compared to 32 months in non-judicial states. A few judicial states—New York and New Jersey in particular—have such extreme backlogs that their problem-loan pipelines would take decades to clear if nothing were to change."

New York has a 607 month backlog of foreclosures, according to LPS. That's 50 years. New Jersey is looking at 483 months, or 40 years. Scheduling delays, antiquated systems, and the sheer number of cases are to blame.

"In judicial states the foreclosure statutes typically require sending notice, waiting a certain 'cure period,' filing a lis pendens [notice of pending action], serving all interested parties (which alone can take weeks even months if someone doesn't want to be found or has walked) or publishing notice, filing the complaint, waiting for an answer (which borrowers can request more time to provide—and borrowers counsel have become very adept at doing), filing motions, getting hearing dates … you get the picture … it takes a lot of time," said Shari Olefson, an attorney and author of "Foreclosure Nation."

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To add to the delays, now some non-judicial states are seeing a big jump in backlogs due to new state laws that while attempting to safeguard borrowers, are delaying the foreclosure process in general.

Nevada instituted a new law criminalizing faulty foreclosures. Banks are taking a big breather there, resulting in the foreclosure backlog doubling in the last 8 months. Massachusetts, a non-judicial state, saw a similar jump after new state foreclosure legislation, and California's Homeowner Bill of Rights, modeled on Nevada's law, went into effect in January 2013, so it too will likely see a slowdown in the clearing of distressed loans.

It all brings into question the recent jump in home values, which is being caused by a huge drop in supply of distressed homes.

Sale prices of homes jumped nearly 10 percent in January, according to CoreLogic. Even with the price surge, inventories continue to drop dramatically across the nation, perhaps because would-be sellers want to see just how high prices will go before testing the waters.

Housing bulls seem unconcerned about the so-called "shadow inventory" of distressed properties, but perhaps they should be. Of the loans that were in foreclosure in January 2012, 42 percent still are, according to LPS. Just 33 percent moved to bank repossession or other forms of liquidation.

In addition, while new mortgage delinquencies are falling in non-judicial states, they are increasing almost 20 percent in judicial states, according to Lender Processing Services.

"The line that we would draw goes through home prices," Blecher speculated. "If those back logs are having any impact on home prices that could drive new problem loans as well."

Weaker prices mean more borrowers are still underwater on their mortgages, owing more than the homes are worth. Underwater borrowers have a far higher new delinquency rate than average.

Foreclosure activity in the fourth quarter of 2012 was down nearly 10 percent from 2011, according to RealtyTrac. While the numbers are still high in some non-judicial states, the cases are clearing quickly, and recovery seems brisk and bullish. In judicial states, especially Florida, the housing recovery will take far longer. A surge in home prices and better performance on newer loans does not mean all the distress left over from the housing boom and bust has suddenly vanished.

Like all things real estate, recovery will be local, and as some markets surge, others will continue to falter.